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Imagine you are standing at your favourite ice cream parlour and eagerly waiting to gobble it up, and you start eating the scoops one after the other continuously. At first, your satisfaction level is at its highest peak and after having 3 or 4 scoops, your level is still increasing, but now at a diminishing rate. Eventually, a point will come when you will be almost close to being satisfied and full, and there will be fewer chances for you to eat another scoop. This is exactly what the law of variable proportion means. Being one of the most popular concepts in the field of business economics and managerial economics, here is an insightful blog to help you understand every aspect of the law.
This Blog Includes:
What is the Law of Variable Proportions?
The Law of Variable Proportions states that as the quantity of a factor is increased while keeping other factors constant, the Total Product (TP) first rises at an incremental rate, then at a decremental rate, and lastly, the total production begins to fall. In other words, as one of the factors in production makes some variation in its quantity, keeping all the other factors constant, the ratio between all the factors starts varying, which further influences the level of output.
Example 1: If a farmer keeps adding more labourers to a small piece of land, the output will go up at first. However, after a certain point, adding more workers becomes less effective and might even lower overall productivity. This happens because the fixed resources, like land and tools, become inadequate for all the workers to use effectively. The law shows that beyond a certain limit, increasing one input results in diminishing or even negative returns instead of more output.
Example 2: Let’s say there is an ice cream shop. If there is just 1 worker in that shop, the service is slow. So the output is low. However, when you bring 2-3 more workers into that shop, the output increases due to quick service. However, increasing the number of workers to 8-9 will make things confusing. This will lead to decreased output. So, you can see that in this case, the output first increases but then slowly decreases due to a change in one input.
Example 3: Okay, let’s take an example of a school. When there is one teacher teaching 10 students in a class, the teaching is very effective. However, if there are 30 students in a class and one teacher is teaching, it is still manageable. But if we increase the strength of the class to 80 students and they are being taught by just one teacher, it will become very difficult. The attention will be very low among students. So, here you can see that learning efficiency fell after a point.
Example 4: If there is a cab service where a certain number of cars is fixed for a limited number of trips. Now, let’s say more drivers are hired. Due to this, trips will increase, but the number of cars is limited. So, due to the addition of more drivers, these drivers will have to wait for care, and this will lead to an increase in waiting time and confusion.
Also Read: Nature and Scope of Economics
Assumptions of the Law of Variable Proportions
The law of variable proportion works under the following situations or conditions that must be met for it to apply. These conditions are called assumptions. They help clarify how production changes when the amount of one input increases while all other inputs stay the same.
Constant State of Technology
The first assumption is that the state of technology given for the situation remains unchanged. In case the technology gets improved, then the marginal product may rise rather than diminish.
Fixed Quantity of Other Inputs
This means that there should be some inputs or factors given in a certain situation which should remain fixed in terms of their quantity. By changing the factor proportions, we can understand the effects on the output. However, the law would not work if all the factors were altered in proportion.
Ability to Change Input Ratios
The third assumption is that the law can only work if there is scope for varying proportions of factors, as fixed proportions might not yield effective results.
Also Read: Class 12 Notes on Economic Reforms Since 1991
Terms to Remember
Before we go ahead with a detailed explanation of the law, let us first understand the different terms that we will be using in this blog.
Production Function
As we know, production implies the transformation of physical inputs into physical outputs. Therefore, the production function explains the interrelationship between the factor inputs and outputs.
On the basis of the time period, production function can be divided into two categories: Short Run Production Function and Long Run Production Function.
Short Run vs Long Run Production Function
Take a look at the detailed comparative table to understand the differences between short-run and long-run production functions:
| Aspect | Short Run Production Function | Long Run Production Function |
| Meaning | Relationship between inputs & output when at least one input is fixed | Relationship between inputs & output when all inputs are variable |
| Nature of Inputs | A combination of fixed and variable factors | All the factors are variable |
| Flexibility | Limited flexibility in changing output | High flexibility in changing output |
| Scale of Production | Can’t be changed easily | Can be expanded or reduced |
| Adjustment | Only variable inputs can be adjusted | All the inputs can be adjusted |
| Time Period | Short | Long |
| Cost Structure | Fixed and variable costs exist | Only the variable cost concept is relevant in the long run |
| Example | Hiring more workers in an existing factory | Building a new factory |
Total Product (TP)
Total Product (TP) is also known as total output, following varied values of a physical variable input, along with a fixed amount of input. This process gives us the value of TP.
Average Product (AP)
Average Product equals the Total Product (TP) divided by the total number of variable inputs. In other words, AP is the output per unit.
Marginal Product (MP)
Marginal Product or output is derived when the producer employs additional units of inputs in variable factors, which further means that it is the rate at which the TP rises.
Also Read: Know all about International Economics
What are the Stages of the Law of Variable Proportion?
In order to understand this in detail, let us take an example. Imagine you own a land wherein you produce rice by employing more and more labour (variable factors). The table given below explains the situation further:
In the above table and graph of the Law of Variable Proportions, you will notice that:
- With up to 3 units of labour employed, the TP is rising at an increasing rate (2,6,12). This constitutes Stage 1 of the law, which is the Stage of Increasing Returns. Therefore, during the first stage, the TP curve increases significantly.
- Beyond the 3rd unit of labour, the TP starts rising at a diminishing rate (12,16,18), which means the TP curve rises at a slower rate. This eventually makes the marginal product (MP) start to fall. Constituting the second stage of the Law of Variable Proportion, which is called the Stage of Diminishing Returns.
- After the employment of 6 units of labour, the TP starts to fall, indicating the 3rd stage, which is the Stage of Negative Returns. Even after employing 6 units of labour, it fails to yield the marginal product, that is, when the MP comes to zero. Eventually, the TP curve starts sloping down and the marginal product goes negative on the x-axis.
Relation Between TP, MP and AP in the Law of Variable Proportion
Now that we understand how Total Product (TP), Marginal Product (MP), and Average Product (AP) behave across the three stages of the Law of Variable Proportion, let us explore how these three are interconnected. Their relationship is essential to understanding how output responds to changes in the variable input and how efficiency varies at different stages of production.
- When TP increases at an increasing rate, the MP and AP also increase. However, at this stage, MP>AP
- When TP increases at a decreasing rate, the MP and AP start to fall. When MP starts falling significantly, and AP falls at a low rate, it means that now MP
- When TP falls, MP goes negative, and AP falls consistently, remaining above the x-axis.
- MP intersects AP when the latter is at the maximum, this is where MP=AP.
Now arises a Million Dollar Question: Which stage of the Law of Variable Proportion should a firm operate in? Is it Stage 1, 2 or 3? Let’s give you a simple answer to this question.
As a rational firm, the optimal utilisation of both the fixed and variable inputs would take place only in Stage 2 of the Law of Variable Proportion. That is the only time when all the inputs are used economically. Additionally, the MP and AP of both the inputs are positive yet diminishing. Whereas, if a firm operates in the first stage, the marginal product of the fixed input (land) is still in a negative form. This is because the smaller units of labour are using the land in a large proportion, thereby yielding no marginal product.
Advantages of the Law of Variable Proportions
There are several advantages of the law of variable proportion. Let’s look at them:
- Helps in avoiding wastage or underutilisation of resources, supporting optimal usage of resources.
- Helps in identifying the stage where production is most efficient.
- Also controls cost by helping in avoiding unnecessary input increases.
- Very useful in business decision-making, where producers can decide about things such as how many workers to hire, how much input to use, etc.
- Helps in avoiding negative returns by making over-utilisation of fixed inputs.
FAQs
The Law of Variable Proportions, also known as the Law of Diminishing Returns, is an economic principle that describes the relationship between the quantities of a variable input and the resulting output in the production process. According to this law, as more units of a variable input are added to a fixed amount of other inputs, holding all else constant, the marginal product of the variable input will eventually diminish.
The 3 stages of the law of variable proportion are the stage of increasing returns, the stage of diminishing returns, and the stage of negative returns.
The Law of Variable Proportion is useful in understanding how output changes when the quantity of one input is varied while keeping other inputs constant. It helps producers identify the most efficient stage of production by observing the behaviour of Total Product (TP), Marginal Product (MP), and Average Product (AP). This law enables businesses to allocate resources effectively, avoid wastage, and maximise output.
Okay, so fixed factors are production are those inputs for which you can’t change the quantity in the short run. For instance, land, buildings, and machinery can’t be changed in the short run. These will remain as they are. However, variable factors are those inputs for which you can change the quantity in the short run very easily. For instance, labour, raw material, or electricity can be changed depending on the production requirement.
Diminishing returns happen in production when some additional units of a variable factor, like labour, are added to the fixed factors of production, like land or machinery. So what happens after some time is that the fixed factors will become overutilised. This leads to inefficiency since the inputs are not in optimal quantity.
Stage 2 is considered the most efficient stage of production. This stage is called the stage of diminishing returns. So what happens in this stage is that the total output keeps increasing and the marginal product is declining, but it’s positive. This ensures that all the resources are optimised properly and there’s no wastage. So, it’s a perfect balance between input usage and output generation.
In the stage of negative returns, the total output starts declining even though the additional units of a variable factor are employed. In this case, you’ll find marginal products becoming negative. This means that there is an extra unit of input, and it reduces total output. The reason behind this is overcrowding of resources or overusing fixed factors. Workers begin to interfere with each other’s work, which leads to production confusion. Fixed resources will also become inadequate to support additional variable outputs. Hence, production becomes very inefficient at this stage.
This is a situation when too many variable factors, like labour, are combined with the fixed factors like machinery or land. This leads to a lack of coordination, more confusion, and reduced efficiency.
Labour plays an important role in the law of variable proportion. When additional labour units are employed with fixed factors like land or machinery, the output increases since there is a better utilisation of resources. But after some time, excessive labour and insufficient fixed factors will lead to overcrowding and may reduce productivity.
So in the case of diminishing returns, additional units of a variable factor increase total output but at a decreasing rate. This stage is productive but is less efficient than previous stages. However, in the case of negative returns, total output decreases due to the addition of variable inputs. So in the case of diminishing returns, additional units of a variable factor increase total output but at a decreasing rate. This stage is productive but is less efficient than previous stages. However, in the case of negative returns, total output decreases due to the addition of variable inputs.
You can avoid or postpone the law of variable proportion through better management practices. However, you can’t eliminate it completely. Some of the ways you can opt to avoid or postpone it include technological improvement, long-run production, efficient management and good quality variable inputs.
A fixed factor constraint refers to the limitation in production. This is caused by fixed inputs in the short run. Since these inputs can’t be increased, it puts a hold on the increase in output. And this doesn’t even improve on adding variable inputs like labour. Because the fixed factor, like land or machinery, is still constant.
Additional Reads
You must be surprised to know that the Law of Variable Proportion has universal applicability in any branch of production. Forming the basis of several doctrines in Economics, students can understand its role in the study of the Theory of Production. So, if you’re looking forward to building a career in Economics and need assistance in choosing the right university abroad, talk to us at Leverage Edu.
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4 comments
thanks a lot, your explanation is very easy
Hey Mohit, we are glad that you found the blog easy to understand.
Thanks for this piece. Can you help with University in abroad for studying Education ( major)& Economics ( minor) at Master’s level?. ( Conditions attach for admission & traveling). Thanks
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